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Rubicon Technology Inc. (NASDAQ:RBCN)

Q1 2008 Earnings Call

April 24, 2008 8:30 pm ET

Executives

Bill Weissman - CFO

Raja Parvez - President and CEO

Analysts

Jed Dorsheimer- Canaccord Adams

Stephen Chin - UBS

Avinash Kant - Broadpoint Capital

Joseph Foresi- Janney Montgomery Scott

Yair Reiner - Oppenheimer & Company

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Rubicon Technology Earnings Call. My name is Nikita, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Bill Weissman, CFO. Please proceed, sir.

Bill Weissman

Thank you, Nikita and good morning everyone. Thank you for joining us today for Rubicon's first quarter 2008 earnings conference call. My name is Bill Weissman, and I'm Rubicon's Chief Financial Officer. With me today is Raja Parvez, Rubicon's President and Chief Executive Officer.

We have one hour for our call this morning. Raja will discuss our first quarter 2008 highlights and accomplishments, and then I will review our financial results in detail and discuss our revenue and earnings guidance for the second quarter and full year 2008. We will conclude by opening the call to your questions.

Today's call is being simulcast on our investor relations website, located at rubicon-es2.com. A replay of this call will be available for two weeks, and the web cast will be archived in the investor section of our website.

Before we start, I will read our Safe Harbor statement and explain the basis of presentation of our financial results. Certain statements in this presentation will relate to future results that are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties, and assumptions as to the future events that may not prove to be accurate.

Factors that could cause actual results to differ material from those expressed or implied include general economic conditions and factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission.

We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. I will reference non-GAAP results on this call relative to our 2007 results of operation. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP.

We have posted a reconciliation of the non-GAAP information to our GAAP results referenced in this call on our web site.

Now, I'd like to introduce our President and CEO, Raja Parvez.

Raja Parvez

Thank you, Bill. Good morning everyone, and thank you for joining us today. I'm pleased to report that Rubicon had a very strong first quarter in terms of our financial performance, and in the execution of our strategies for increasing and diversifying revenue, expanding our production capacity and the continued enhancement of our technology to ensure we maintain our leadership position.

Regarding our financial performance for the quarter, our revenue in the first quarter totaled $10.5 million, a 46% increase over the first quarter of last year and a 10% sequential increase. Diluted EPS was $0.10 per share for the first quarter, which exceeded our expectations.

The LED, SOS, and optical markets that we serve, remain strong and we continue to expand capacity as rapidly as we can to meet the demand. As previously stated, one of our objectives this year is to continue to diversify our revenue base.

We believe this is important because diversification reduces our exposure to any one market while positioning us to maintain leadership in both LED and SOS and supporting our margins by utilizing our large diameter advantage.

This quarter, we were able to achieve the revenue mix we have been targeting, which is approximately 60% of revenue coming from the LED market, 30% from the SOS market and 10% from the optical market and other sources.

We are very pleased that we have achieved this revenue balance in Q1 and we will be working very hard to continue to maintain this balance.

As I mentioned, demand in our key LED and SOS markets continues to be robust. In the LED market, application for high brightness and high-powered LEDs are growing rapidly. Key end-use application driving high demand for these high-power LEDs include backlighting units for larger displays such as notebook computers and flat panel televisions.

LED signage for very large advertising and stadium displays, LED headlights for the automotive industry and solid state lighting applications such as streetlights. LED backlight units are being adopted by notebook manufacturers at an increasing rate and the penetration rate may now reach over 10% in 2008.

Auto manufacturers are increasingly announcing new models that come with LED headlights and are daytime running lamps. LED streetlights are being adopted quickly in China and will soon penetrate into the European and North American markets due to significant energy and maintenance cost savings versus traditional high-intensity streetlights. These starts will need high-brightness white LEDs.

The LED technology leaders are benefiting the most right now from this rapid applications growth. Leading LED companies in Japan, Europe, North America, Taiwan and Korea are experiencing strong demand for the high power chips. These growing applications also continue to attract very, very large new entrants into LED production such as multibillion dollar display and semiconductor manufacturers.

Rubicon Technology is well-positioned as a market leader in high volume sapphire production. We provide 2, 2.5, 3, 4, and 6-inch diameter sapphire for our customers who serve these leading LED technology manufacturers.

Additionally, these high-performance LED applications tend to require larger chips. And in turn, LED manufacturers are shifting more production to larger diameter sapphire such as 3-inch and 4-inch wafers to increase throughput and reduce their overall production costs. This trend within the LED market are shifting to larger diameter substrates is very favorable for Rubicon Technology.

As I mentioned in our last earnings call, we expected to see a pickup in demand for larger diameter products later in the year. We are now seeing stronger demand for larger diameter LED substrates and expect those products to gradually increase as a percentage of our LED revenue through the remainder of the year.

We have also received request and orders for 6-inch sapphire substrates for use in next-generation LED R&D efforts. As you know, our key differentiation is in high-quality, larger diameter material. These signs that the LED market has continue to migrate to our larger diameter substrate is very positive for Rubicon.

The SOS market continues to expand very rapidly as this technology continues to gain market share in the mobile communication markets. Our customers have expanded their capability and capacity to better serve their growing demand. This has translated to high volumes and increasing revenue for Rubicon's large diameter SOS business.

Our optical business also continues to grow. Optical and other revenue remained at target levels, so it kept pace with overall sequential growth. Larger diameter sapphire applications continue to grow in this business as well. As an example, 6-inch diameter sapphire utilized for wafer carriers is growing nicely.

We are on track with our R&D initiatives. Most notably, our efforts to produce high quality 8-inch sapphire products, which will be next-generation substrate for the SOS industry will help us better serve growing applications in our optical business and keep us several generations ahead in the LED industry.

We now have larger furnaces operational producing larger, high quality, sapphire crystals to better serve the 6 and 8-inch markets.

I am very excited by how the markets we are serving continue to develop. I believe we are extremely well positioned to continue to serve these growing markets. Our biggest challenge remains to increase our capacity. And we continue to keep pace with our aggressive plan for adding operational equipment.

We are off to a good start in 2008. And signs are positive that the remainder of the year will be equally strong. We are rapidly populating our new crystal growth facility. And we are adding production capacity in all stages of our manufacturing processes.

I would now like to turn the call over to Bill, who will provide you with greater details on the financial results for the first quarter and provide our outlook for the second quarter and remainder of the year.

Bill Weissman

Thank you, Raja. We had a very strong first quarter with revenue of $10.5 million, up 46% year-over-year, and up 10% sequentially. We were able to start building out crystal growth furnaces in our new facility earlier than anticipated. As a result, our first quarter revenue came in a bit higher than expected.

Demand remained strong in our three key markets. As Raja mentioned, in order to achieve the desired mix, we directed most of our incremental capacity to the SOS market in the first quarter. Revenue from the SOS market has more than tripled from the first quarter of last year and increased 49% sequentially.

Revenue from the LED market was consistent with the fourth quarter of 2007 due to limited capacity and increased shipments to the SOS market. As Raja mentioned, we are now at our desired mix of revenue across the three market areas.

The exact revenue mix in the first quarter was 62% for the LED market, 27% to the SOS market and 11% to the optical market and from other sources. Going forward, we expect to be allocating production proportionately, so that we have consistent growth across these three markets.

During the first quarter, 58% of our revenue came from large diameter products, which we define as 3-inch or greater. This compares to 27% in the same quarter last year, and 55% in the fourth quarter of 2007. The sequential increase reflects the increase in 6-inch wafer sold into the SOS market, offset in part by a larger percentage of 2-inch materials sold to the LED market.

As we mentioned last quarter, we expected 3 and 4-inch sales to be down a bit in the first quarter and then strengthen later in the year. As Raja just mentioned, we continue to expect larger diameter products to gradually increase as a percentage of our LED revenue through the remainder of this year.

Backlog at March 31, 2008 was approximately $35.5 million, which is our beginning quarter backlog of $45 million less quarter-one revenue plus approximately $1 million of new orders, all of this backlog is for delivery in 2008.

The new orders are consistent with our expectations given that it is too early for customers to make commitments on 2009, our expected capacity for this year and our desire to keep a small amount of capacity for strategic use.

Diluted EPS of $0.10 per share exceeded our expectation due to the significant increase in share count, as a result of our IPO last year and the non-cash charges associated with preferred stock and warrants that were outstanding prior to the IPO, EPS is not comparable to prior periods.

Our gross margin for the first quarter remains strong at 36.8%. This compares to 29.8% in the same quarter last year and 39.1% in the fourth quarter of 2007. The year-over-year increase is reflective of a shift in product mix towards higher margin, large diameter products.

As expected, gross margin decreased sequentially due primarily to salary increases, which were effective, the first of the year. And additional costs associated with the new facility in Bensenville offset in part by higher margins from the change in product mix.

We still expect gross margins to remain in the mid-30s throughout the rest of the year. We will have a roll off of our contract research revenue in Q3, have higher energy costs, and expect some reduction in ASPs, which we expect to partially offset by gradually shifting product mix to larger diameter.

Regarding pricing, in the SOS market, our 6-inch pricing will come down as volumes increase. In the LED market, there continues to be pricing pressure throughout the supply chain, but we believe we will keep ASP reductions within the range that has been built into our projections.

Our operating margin in the first quarter of '08 was 14.1%, compared to 12.7% in the first quarter of last year and compares to our non-GAAP operating margin in the fourth quarter of '07 of 16.4%.

The year-over-year increase in operating margin as a result of significant increase in gross margin, offset in part by a higher operating cost associated primarily with the build out of back office support, required to operate as a public company.

The sequential decrease is a result of the decreasing gross margin. We were able to keep operating expenses as a percentage of revenue fairly consistent with the fourth quarter of 2007 through tight cost control despite a full quarter of public company costs.

Turning to the balance sheet, we have $72 million in cash and investments at the end of the quarter with no debt. DSO remains low, but increased slightly from 45 days in Q4 '07 to 49 days in the first quarter of this year. However, our cash conversion cycle decreased sequentially from 44 days to 39 days due to lower days in inventory and higher days payable outstanding.

As expected, our capital expenditures were high in the first quarter at $4.7 million as we ramp up the Bensenville crystal growth facility and add capacity to our post crystal growth operations. Approximately $1.7 million of this CapEx was covered by cash generated from operations in the quarter.

Now I would like to share with you our outlook for the second quarter and remainder of the year. We anticipate revenue in the second quarter of $11.5 million, and diluted EPS of $0.11 based on a projected diluted share count of 22.5 million shares.

Regarding the full-year 2008, as you know, we continue to add significant capacity and our full-year revenue and EPS estimates have been based on that expected added capacity throughout the year. We had a strong first quarter and expect Q2 to be strong as well.

However, we are not raising our top end of the range of our estimates until we are sure capacity can continue to come online ahead of schedule. We are, however, tightening our range of anticipated revenue for 2008 to between $47 million and $49 million and our diluted EPS range to between $0.45 and $0.47.

These EPS estimates exclude costs that may be incurred by the Company associated with the proposed secondary offering currently in registration, which we estimate to be approximately $400,000 or approximately $0.02 per share.

In closing, the technologies and the corresponding applications in LED, SOS, and optical markets we serve continue to gain broader acceptance. And we are very excited about the potential that exists for our customers and for Rubicon.

We have made great progress this quarter in continuing our technology leadership and in ramping up production while delivering strong financial results. We look forward to continued success in 2008. I want to thank all of you for joining us today.

And now, operator, we'll take our first question.

Question-and-Answer Session

Operator

(Operator Instructions).Your first question comes from the line of Jed Dorsheimer of

Your first question comes from the line of Jed Dorsheimer of Canaccord Adams. Please proceed, sir.

Jed Dorsheimer- Canaccord Adams

Hi. Thanks and congratulations on a good quarter, guys.

Bill Weissman

Thank you.

Jed Dorsheimer- Canaccord Adams

A couple of questions, I guess first, Raja, if I heard you correctly, is this a correct way to look at it that in the LED market, you're starting to see 4-inch commercial adoption and starting to see 6-inch at the R&D level? I haven't heard of any 6-inch. That's why I was asking.

Raja Parvez

Yes. The 4-inch has already started a volume production in commercial production. But still our customers and our customer's customers are still optimizing their manufacturing processes. And yes, 6-inch R&D efforts have already started. As I mentioned that we have requests from two companies and we've provided samples to one of them to start the next-generation LED development in this area as well.

Jed Dorsheimer- Canaccord Adams

All right. And then looking at the Blu-ray opportunity, which is starting up and those laser diodes are manufactured on sapphire, is that going to be manufactured on 2-inch sapphire or 3-inch? And are you starting to see that business ramp?

Raja Parvez

I think that it will be a combination of 2-inch and 3-inch. As you know there are one of the majority LED manufacturers in Asia is manufacturing those. So their standard LED-manufacturing pattern is 2-inch moving to 3-inch, so it will be a combination now. But I believe eventually the way the market is right now we see is the LED industry is moving towards larger and larger diameters because of the higher throughputs and larger die size needs.

So I believe as we move forward, later part of this year, you will see that more and more the laser diodes will be manufactured on the larger size die, especially 3-inch and plus.

Jed Dorsheimer- Canaccord Adams

All right. And then as you ramp your new facility, any updates I guess on the new facility? I think last comments you made was that you expect to have 40% of the new facility completed by the end of the year.

It sounds like that's going ahead of schedule based on the upside this quarter. Is that still the metric that you're using for the end of the year, or is that build out happening faster than that?

Bill Weissman

Well, the build out started a little ahead of schedule. But it continues, we add furnaces incrementally at the pace we had expected so far. So we got a little earlier start so we'll be a little bit ahead of the game at the end of the year.

Jed Dorsheimer- Canaccord Adams

All right. And then have you locked in electricity pricing for the new facility?

Bill Weissman

No. Our electric contract expires in May. And we are negotiating a new contract. Mostly we've consulted with several experts and rates are very high right now. So they're advising us not to lock into a long-term agreement right now but to let it float for a little while until they expect it to come down.

I have received several questions on the electric costs that I have not been able to answer until this call, because I want to make sure everybody got the information at one time. The electric costs that we're seeing will be roughly about 20% higher than we had under our old contract. Now electricity, utilities are about 10% of our manufacturing costs.

So it'll have about on average maybe about 125 basis point impact. However, the impact in the summer months, June through September, is significantly higher, since the rate, even under our old contract the rates are much higher in the summer months, so it could be in worst case up to 250-basis point impact in the summer.

Jed Dorsheimer- Canaccord Adams

Got you. So I would assume that's speaking to some of the conservatism in terms of the full-year guidance.

Bill Weissman

On gross margin, that's correct.

Raja Parvez

And also, Jed, we've continued to focus on the cost control. And we'll do our best to offset some of the additional energy or utility costs.

Jed Dorsheimer- Canaccord Adams

All right, and then last question, just moving over to the silicon on sapphire markets. It sounds like you're getting your first furnaces, the larger furnaces in order to do the 8-inch. Timing associated with that transition from 6-inch to 8-inch, how much I guess as Peregrine moves to the 8-inch, what type of qualifications are needed on the new process?

And therefore is it like a 6-month type window that we should expect there, sooner or longer than that, any additional color? Thanks.

Raja Parvez

First, our larger furnaces are operational and we are bit ahead of schedule. We have successfully produced larger boules. And we've already cored the products from out of those boules. We're currently in a process of slicing them and also lapping them. And eventually we'll provide a finished product on track. It is on track and we will meet all the commitments that we have committed to our customers.

Now after we send this product to our customers, they have to go through their qualification process. And based on, obviously this is very important for our customer and important for us also.

And I believe that still it is anywhere from 9 to 12 months of a window after they receive our samples to the qualification process because they have to do their silicon on sapphire and also the CMOS processing. So I believe still it is about 9 to 12 months of window before it gets into the early production.

And so later part of 2009 and beginning of 2010 is when you will see some volume increasing in this area.

Jed Dorsheimer- Canaccord Adams

Great. Thank you.

Raja Parvez

Thank you.

Operator

(Operator Instructions). And your next question comes from the line of Stephen Chin of UBS. Please proceed.

Stephen Chin - UBS

Okay. Good morning, thank you. My congrats also on the ramping of the new factory.

Raja Parvez

Thank you.

Stephen Chin - UBS

Raja or Bill, can you try to give us a better idea of how impactful this new factory will be, will this new factory represent somewhere around 5% to 10% of the total production in the second quarter? Just trying to get an idea of how big of an impact it's having right now.

Bill Weissman

Well, again, our older facility, the Franklin Park facility had a capacity for producing about $36 million of annualized run rate, so really all the excess over and above that is coming from the new facility.

Raja Parvez

Yeah. Stephen, in addition also as you know that this is really truly a state-of-the-art brand new facility. And not only it is already contributing to our revenue stream, but it is also providing a redundancy and guarantee for our customers because these two locations are about three miles apart, so there is lots of other benefits as well.

But this is already contributing to the revenue and we are populating per plan and in some cases we're ahead of the plan. So it is already contributing and continue to focus on further increasing and populating this facility so that we can meet the demand of our customers in other markets.

Stephen Chin - UBS

Okay, thanks. That was helpful. And the other question I had is in terms of the new orders I think you said there were only about $1 million of new orders this quarter. Which quarter going forward, Raja or Bill, do you think we'll expect to see these new orders grow more meaningfully?

Is this more of a second half '08 event that we see the new orders ramp more significantly?

Raja Parvez

Yeah. I think that you will see the more orders growing significantly in the second half of the year, because as you know, especially in the beginning of Q1 of every year there are some inventory adjustments and also the budgets are set and new technologies are set, especially in the holiday seasons more and more consumer products are manufactured.

So we'll see that the uptake or the improvements in those orders in the second part of this year, yes.

Stephen Chin - UBS

Okay. The other thing I want to clarify is you mentioned that LED-related sales, they were flat-to-down slightly I think in the first quarter, was that a decision to focus less on LED-related sales due to pricing pressure in the LEDs?

And is it your expectation that sales to LED customers will be up sequentially in the second quarter?

Bill Weissman

Yeah. It was consistent with last quarter. And again, it was really capacity issue and how we direct the capacity, which was largely dictated by our contracts. You may recall last quarter, we said that our large diameter products would remain in around the same range of 55-ish percent, which was a combination of more 6-inch going to SOS and a slightly down 3 and 4-inch, which is what happened.

And then in addition to that, the incremental production that we were able to achieve over and above what we had expected, all went to 6-inch SOS market as well. So it really is not reflective of the demand. There's plenty of demand in LEDs. It is where we were obligated to direct our production, and where we wanted to direct it in order to achieve our optimal mix.

Raja Parvez

And also, Stephen, our main objective is, continue to focus on the larger diameter and wherever the opportunities are. As you know the larger diameter opportunity currently is SOS business followed by the 3 and 4-inch business in the LED. So we're trying to continue to diversify our business.

As the industry is also moving toward the larger diameter, we are moving toward larger diameter. That's where our better economics for our customers and for us. And that's where we have also technology differentiation as well, so the directionally we are on the right direction from all aspects of this event.

Stephen Chin - UBS

Okay. So we should expect LED sales to increase sequentially in the second quarter, is that a fair estimate?

Bill Weissman

Yes. Again, we're now focused on distributing production equally so we can maintain that same mix. So yes, LED revenue should increase next quarter.

Stephen Chin - UBS

Okay, thanks. The last question I had is there were a bunch of industry reports talking about TSMC looking to enter the LED market. When is the earliest we would likely see any possible sales to TSMC? Is that like a second half '08 opportunity?

Raja Parvez

Yes, Stephen. First of all that's very positive news for Rubicon Technology, because when companies like TSMC has announced to get into the LED business, this also is a further testimony to the strength of this industry.

The second that we seize this that I think second half of the year, especially tail end of Q3 and Q4 you will see that there will be some movement in the orders coming from TSMC via through old partners and old customers.

Stephen Chin - UBS

Okay. Thanks and congratulations again.

Raja Parvez

Thank you.

Operator

Your next question comes from the line of Avinash Kant of Broadpoint Capital. Please proceed.

Avinash Kant - Broadpoint Capital

Good morning, Raja and Bill.

Raja Parvez

Good morning

Bill Weissman

Good morning.

Avinash Kant - Broadpoint Capital

Just to get some clarity on the bookings pattern, I know you talked about some seasonality in the first quarter. Could you give me some idea about the orders in the second half of '07, how they tracked, and then maybe give me some idea about how to expect the ramp in the second half of this year?

Raja Parvez

Well, typically what happens is this, that when we did the bookings for 2008, especially the bookings for 2008 started in the late part of Q3 of 2007. And those orders were confirmed in the beginning of Q4 2007. That's very typical with the industry. And that's how our customers and visibility they have.

So I think we expect to see the same pattern. We have already started initial discussions with our customers regarding 2009 orders, but because of the visibility and the timing and how the market is moving towards the larger diameters, we expect the trend to continue. And I believe that in the tail end of Q3 and beginning of Q4 we'll start seeing the significant bookings for 2009.

So the pattern will continue and that is pretty consistent with this industry because of the visibility and the very fast growing market in terms of especially moving, shifting from 2-inch material to the larger diameter material.

Avinash Kant - Broadpoint Capital

Okay, so we shouldn't expect any change in terms of seasonality there. We should expect strong ramp in the third and fourth quarter you're talking in terms of bookings, right?

Raja Parvez

Yes.

Avinash Kant - Broadpoint Capital

Okay. And a little bit on the capacity side. I know you had expanding capacity at this point, but I was just trying to understand what are the constraints longer-term constraints that limit you in terms of how much capacity can you bring online in one year?

What I'm trying to understand is that in '09, how much more capacity could be brought on by the Company? What's the limit on that?

Raja Parvez

Well, first of all that we'll be bringing on the capacity consistent what we have already planned for. However, we're trying to expedite as much as we can. The key factor that obviously is a traditional is the lead times of the components that we buy, the recruitment of the skilled workforce, and the training, and the piece part. It's just lead-time piece parts in the new facility we have the basic infrastructure in place.

But still the other elements also play in there, and I believe that in 2008 what the capacity we have will be consistent. And as we move forward, I think we get into some possibility that we maybe able to increase in 2009, but I think 2008 will be remain what we have already planned for.

Avinash Kant - Broadpoint Capital

Right, but what I'm trying to see is that, so if you saw the demand, I'm trying to get to the extreme case. If you saw the demand in '08, such that you could maybe do 60% higher revenues or 70% higher revenues in '09, would you be able to meet that demand in terms of how much capacity can you build. Can you build 70% capacity in '09?

Bill Weissman

Well, we're building capacity, what we've got into is as fast as we believe we can build it out right now. We're obviously hoping as we get further down on our line, and have done this for a while, we'll have figured out ways to accelerate that some.

But I think it's too early right now to say for sure whether or not we'll be able to accelerate that growth pattern.

Raja Parvez

Avinesh, another color on this answer is this. Typically it's from ground zero if we are to make a decision today that we are going to increase the capacity, approximately the lead times on adding anywhere from four to six months by which we are able to operationalize the brand new equipment now.

And that again, consistent with the lead times, we will have an advantage in ,2009 because the brand new facility will have a full infrastructure in place. But again, we also continue to look for the larger furnaces. And we are seeing because larger furnaces traditionally will make a larger boule. And there's more real estate utilization.

So we're also looking at what capacity we add, not only in terms of the machine capacity, but how do we improve the yields and throughput and also operationalize so that we can get more efficiency out of the manufacturing processes.

So it is not only addition of additional machines there are also optimizing the processes and focusing on the larger boule growth, so that we can have a more, more wafers per unit area.

Avinash Kant - Broadpoint Capital

Okay. And one final question, in terms of the ordering patterns from your client, the backlog that you have at this point, does that consist a lot of longer-term contracts, or more on a next year kind of on a few quarters out kind of contract?

Raja Parvez

Well, it's a mixture. But some are longer-term and some are on a quarterly basis.

Bill Weissman

The backlog we just talked about is all to be delivered this year.

Avinash Kant - Broadpoint Capital

But do customers sign multiyear contracts with you, or could sign multiyear contracts with you?

Raja Parvez

Well we have a few of them like that, but we will be, as I said, we are initial discussion with our customers. And we'll be focusing on this. As the industry matures, as the more visibility increases for our customers and I believe that there are possibilities. But we will have to see how the industry, how the macroeconomics comes into play as well.

Bill Weissman

Yes, it shifted again just from a terms business not long ago. Last year we started receiving 12-month and even 18-month orders. And we're hoping that at the end of this year demand will be so strong that customers will want to lock in for multiple years. And that would be a new development that would reflect an even stronger demand.

But we certainly believe that at the end of this year, we'll start to see orders from some customers for all of next year.

Avinash Kant - Broadpoint Capital

Okay. So would you be able to give us some idea in terms of percentage of the backlog, how much of it is like a full year kind of contract and how much is on a quarterly basis?

Bill Weissman

Well, right now all of our backlog is to be delivered this year. We don't have any '09 orders at this point in time.

Avinash Kant - Broadpoint Capital

No. I'm saying how much of this was ordered in '07, late '07 for the fullyear of '08?

Bill Weissman

Okay. Yeah, well, again, we left the year at $45 million of backlog, right? So leaving the year last year, we had essentially all of our capacity or certainly the vast majority of our capacity sold for this year.

Avinash Kant - Broadpoint Capital

Perfect. Thanks so much for your help, very helpful.

Raja Parvez

Thank you.

Operator

Your next question comes from the line of Joseph Foresi of Janney Montgomery Scott. Please proceed.

Joseph Foresi- Janney Montgomery Scott

Hi, guys, and nice quarter. I just had a couple of questions here. I wonder if you could give us color as best as possible on how much of the new facility is completed. I know you sort of said it's a 40% completion by the end of the year, maybe on a percentage basis, how much of that facility is completed already?

Bill Weissman

Well, we're on track. So we have probably 15%, 20% of it done already, and we certainly believe we will be at the 40%. Since we got a little earlier start, we'll probably be a little ahead of the 40%, 45% or so by the end of the year.

Joseph Foresi- Janney Montgomery Scott

Are you maxed out at utilization at the other facility?

Raja Parvez

Yes. We are currently, Joe, maxed out at our current facility. And just put some more color on the new facility, there are different phases. Phase I was to build out the infrastructure. That is the cooling and electric system. That is fully complete. Now we're adding on a monthly basis more and more crystal boule furnaces. That is bit ahead of the schedule.

As Bill mentioned, we are probably about 20% build out. And I think that will go more smoothly because the basic infrastructure is already in place. It's just now matter of assembling those furnaces, integrating them and operationalizing them.

Joseph Foresi- Janney Montgomery Scott

Okay. And so just as far as the build out is concerned, it seems like you guys are ahead of pace, but you didn't raise obviously the top end of revenue. Maybe you can give me some idea of what the thought process was, and I guess staying conservative on the revenue side even though you're ahead of schedule?

Bill Weissman

Sure. Well, as you know we gave a range both revenue and EPS for the full year. Certainly getting us to an earlier start helps us get near the top of that range, so that's why we've kind of tightened the range and moved the bottom end up, but again, the top end of the range was set based on kind of best case scenario of we felt at the time of how much capacity we can add.

At this point, we want to make sure that we continue to add capacity on schedule and hopefully even ahead of schedule, and would hope to be able to raise that top end of the range later on. We think it's prudent not to do that quite yet.

Joseph Foresi- Janney Montgomery Scott

Okay. And then you talked about a 250-basis point hit from energy spikes in the summer quarters. I wonder if you could just give us some rough idea of what the offsets were and how much you're expecting to get from each?

Bill Weissman

How we're going to offset that summer impact?

Joseph Foresi- Janney Montgomery Scott

Yeah.

Bill Weissman

It's got to come from two sources. One is the improvement product mix in terms of both larger diameter and core versus wafer. And secondly, it's going to come from cost reductions and operating efficiencies.

Joseph Foresi- Janney Montgomery Scott

And then, I wonder if you could just talk about the client base quickly. Maybe you could talk about any changes in the revenue concentration of the clients? And have you seen an uptick in the number of clients? And if so, not exactly who, but where are those new clients coming from?

Raja Parvez

Well, first of all yes we have added new customers. And those customers are some in North America and some in Asia. And I think that at the client list and customer list is now even further improved because more and more larger companies are getting into this market, and we are a market leader in this market.

So we are leveraging those positions, so it's very positive for Rubicon what has happened in Q1. And I believe that it will continue in the remainder of the year as well.

Joseph Foresi- Janney Montgomery Scott

Okay. And has client concentration come down?

Raja Parvez

Well, I think that the client concentration from the actual data point of view is to remains probably consistent.

Bill Weissman

It's come down a little bit. Top ten was 78% last quarter; it was 72% this quarter

Joseph Foresi- Janney Montgomery Scott

Okay, good. And then just lastly on the pricing and the products and their reference to cost of goods, how has pricing been so far? And maybe you could just talk about some of the supplies, if there's any movement in the pricing of the contracts, and of course if there's any uptick in the supplies?

Bill Weissman

Pricing as we mentioned, the 6-inch product we were ramping from kind of R&D level production to larger volumes. And we have a contract with our customer that calls for us to produce, to deliver larger volumes each quarter. And in exchange for that we're gradually reducing the price.

LED pricing for the first quarter is fairly stable. As far as the rest of the year, there's just price pressure throughout the whole supply chain in LED, because everybody wants to get to general illumination adoption faster.

So everybody's trying to reduce costs as quickly as possible. But again, we think we'll be able to manage that and keep ASPs within our targeted range that's built into our projection. And your other question I think was around the supply of our materials, our raw materials?

Joseph Foresi- Janney Montgomery Scott

Crystals, yeah.

Bill Weissman

It's coming up a bit. The challenge there is the weak dollar. We buy a lot of that material from foreign sources. And they've been complaining to us about the impact of the dollar, so we have been seeing some increases there. But nothing tremendous, it's just kind of the 5% kind of a thing.

Joseph Foresi- Janney Montgomery Scott

So it's about 5% on the product side?

Bill Weissman

Yeah. On average.

Joseph Foresi- Janney Montgomery Scott

Okay. And then the pricing is probably coming down on the 2 inches wafers. Do you have a rough percentage range for that?

Raja Parvez

Yeah. Pricing pressure is more than obviously 2 inches, because that's more available market and used market, but roughly in the range of about 5% to about into that range.

Joseph Foresi- Janney Montgomery Scott

Okay. All right, thank you.

Operator

Your next question comes from the line of Yair Reiner of Oppenheimer & Company. Please proceed.

Yair Reiner - Oppenheimer & Company

Yes, thank you. A question on the SOS market, can you talk a little bit about what's kind of driving demand in the end-market, and how you see that demand maybe building and developing over the coming year, for couple of years?

Raja Parvez

Well, first of all the SOS market is expected to grow at least 50% for year-over-year for next several years. And the key demand is actually is the mobile communications and the end users that OEM customers are now utilizing this SOS technology relative to current solutions, so this is a disruptive technology, but it is a proven technology.

What we get the feedback from our customers is that their demand is increasing significantly and accordingly they increase their capacity, so we expect to see good growth this year and in the coming years as well.

Yair Reiner - Oppenheimer & Company

And do you expect to diversify your customer base beyond Peregrine, or what are your thoughts on that?

Raja Parvez

Yes. We are already diversifying our customer base in the 6-inch market. But yes, we continue to do so and we've already done so as well in some cases.

Yair Reiner - Oppenheimer & Company

Okay. Can you talk maybe a little in terms of the model, how you expect operating expenses to develop throughout the year? And how much of the public company costs were already kind of fully reflected in the first quarter? And how much more perhaps might we see in the June quarter?

Bill Weissman

Well, the first quarter would be the heaviest as far as public company costs for us. And we'll see it start to gradually come down throughout the rest of the year.

Yair Reiner - Oppenheimer & Company

Okay. And in terms of R&D on sales and marketing? How should trend over the long-term.

Bill Weissman

R&D and marketing will remain in the 2% to 3% of revenue range this year, and we believe even long-term.

Yair Reiner - Oppenheimer & Company

Okay. Thank you very much.

Raja Parvez

Thank you.

Operator

This concludes our Q&A session. I will now turn the call back to our CFO, Mr. Bill Weissman.

Bill Weissman

Thank you. Thank you again for joining us today, we appreciate your interest in Rubicon and look forward to talking to you again soon. That concludes our call, operator.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

Raja Parvez

Thank you.

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Source: Rubicon Technology Inc. Q1 2008 Earnings Call Transcript
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